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I'm sure this isn't the right forum for this question but I couldn't see anywhere else to post it.
I'm looking for some information & advice & hoping that some other community members will have some good input.
We have owned our vacation rental in Florida for almost 8 years. The home has never broken even - we have made a loss each year, even when there has been a healthy amount of rentals. Raising our rates does not help - there is too much competition.
A few years ago my husband had an illness & had to change his job & take a large drop in salary.
As a result I have been handling all the costs of our vacation home by myself.
Last year we started to have problems - firstly the A/C broke down and was an expensive fix. Secondly, we had guests that introduced bed bugs.
We have had professional pest control in several times but so far the pests seem to keep coming back. I have had guests leave in the middle of their stay, some I have had to find alternative accommodation for before they arrive, and others I have just had to cancel. We get the all-clear from the pest company and so allow guests back in, only to find several weeks later that a guest reports bites! This is costing loads of money in terms of pest control, laundry & cleaning and lost rentals. Also, we are now being sued by the first family that were bitten, and being threatened with action by another.
I am really run down by it all. The amount of work involved in bringing in rentals and now the added stress of these pests is making me want to get rid of the home. However, our mortgage is more than the value of the property. Currently there are no outstanding debts other than the mortgage itself. Our HOA, utility, taxes etc are all up to date. I would like to know what our options are. Would we be able to do a short sale or do we need to be delinquent in our mortgage? Is there a way to return ownership of the property to our lender & just walk away?
We are not US residents - we live in the UK so don't fully understand all the intricacies of US real estate ownership (we researched how to buy but we didn't expect to be facing this!)
I'm thinking of meeting with our (US) lender to discuss this the next time we come over for a vacation, but in the meantime if anyone has any input I would grateful to hear it.
Thanks (& sorry for the long post) !
Very sorry about all the problems you are facing. Probably not very many VR's have a positive cash flow but you have been facing some extreme challenges!
Before you make any decisions on what to do you need to consult your attorney and your accountant.
From a quick search: http://www.creditsesame.com/blog/6-ways-to-get-out-of-an-underwater-mortgage/
(excerpt shown below)
I'm not sure how any of these would work for a foreign national, thus I stress the need for professional legal and financial advice! There may be other options not mentioned in this article. I would be very surprised if your bank was at all helpful.
I hope it all works out.
With the U.S housing market still in trouble, more and more homeowners are having to become familiar with a term they'd never heard just five years ago: negative equity. Equity, as it pertains to mortgages, is the amount of the value of your house that exceeds the amount you owe on your mortgage. Negative equity is the value of your house below what you owe on it.
So, for example, if you owe $250,000 on your home but it's only worth $200,000, you have $50,000 of negative equity. If you're in this unenviable position, you're not alone. According to real estate website Zillow, more than 28% of U.S homeowners are in a negative equity position because they owe more on their homes than those homes are worth.
Having negative equity makes it hard to sell your house because a potential buyer is very unlikely to make you an offer sufficient to cover your loan balance. And, even if they did make you a large enough offer to pay off your loan, their mortgage lender wouldn't approve them for that amount because the appraisal results wouldn't justify a large enough loan amount.
So, the question for those of us who are “underwater” in our homes is, how can I get out of this house? Fortunately, there are several options -- some good and some horrible -- for homeowners who are trying to get out of a bad mortgage loan. Here are six of those options and their impact on your credit:
1. Short sale
A short sale occurs when you sell your house for less than you owe your mortgage lender. Your mortgage lender is going to have to accept the lesser offer and if they do, you've “sold short.” In the aforementioned scenario, an offer of $200,000 would leave a $50,000 deficiency balance on the loan. That deficiency balance is often reported to the credit reporting agencies as being “charged off.” And, more commonly, the account is reported as being “settled for less than the full balance.” In either scenario, your credit score is likely to take a hit because both of those scenarios are considered derogatory by all credit scoring systems.
2. Strategic default
A strategic default occurs when a homeowner is still fully capable of making their monthly payment but simply chooses not to do so. Many homeowners are choosing to default because they realize they're throwing good money after a bad mortgage and to them it's simply a better business decision to stop paying despite being able to afford the payments. This is reported to the credit reporting agencies as a foreclosure, which is considered derogatory by all credit scoring systems.
3. Forfeiture or deed in lieu of foreclosure
Some people call this “jingle mail” because you're essentially mailing your keys back to the lender and voluntarily moving out of the house. You avoid the process of judicial foreclosure and the embarrassment of the local sheriff evicting you in front of the entire neighborhood. This is reported to the credit reporting agencies as a forfeiture of your deed. And yes, it's considered derogatory by credit scoring systems.
4. Buy and bail
The buy and bail occurs when you live in a house, apply for and qualify for a mortgage on a different house, close on the new loan, move to the new house… and then stop paying on your pre-existing loan. You've “bought” a new house and “bailed” on your old lender. This is an enticing, and arguably illegal, option for people who see similar homes in their same local area going for a fraction of what they paid for their existing house. The credit reporting of the previous home loan will be derogatory as it will undoubtedly identify that you defaulted on your loan. But, consumers realize that when you lock in a rate for 30 years or 15 years, the rate cannot change despite the negative change in your credit scores.
5. Loan modification
A loan modification occurs when your lender permanently or temporarily lowers the interest rate of your mortgage loan to a point where you can afford to make the monthly payment. There has been a lot of coverage of the President's “HAMP” program, which is the government sponsored loan modification program. Prior to approving a loan modification, which is not a slam dunk, the lender will ask you to make trial payments, which are generally lower than your contractual payment amount.
A loan modification can damage your credit if the lender reports you as being delinquent each month during the trial payment period. If your loan was NOT delinquent going into the loan modification, then they're not suppose to report you as delinquent during your trial payment period. However, if you were delinquent going into the loan modification then they are supposed to report you as delinquent even during the trial payment period.
6. Paying the deficiency out of pocket
The only truly clean way out of a bad mortgage would be to sell your home for as much as you can and then come up with any deficiency balance in cash at closing. This means the lender's loan has been fully satisfied and will result in no negative credit reporting. Of course, you might have to come up with tens of thousands of dollars (if not more) just to save your credit rating. For many consumers, that price tag may be just too high.
I'm so sorry for all your hardships --- it's all piling on, isn't it? Maybe it's time to think of why you bought the house in the first place -- were you expecting to make money or just cover some expenses for a while until you move in yourself? Many of us are in the second group, and actually losses on rental housing can be an excellent and very legal tax shelter for other income. But others do seem to make a profit at this business.
If you examine the options laid out nicely above and don't see that any of them will work for you, then it's time to figure out if you can turn your business around and make some profit.
First, you have to take care of the bedbugs -- you've seen the other thread where you posted your problem, I hope, with a recommendation that you get a better bed bug exterminator.
While that is being taken care of, time to examine your finances. If your goal is to make money on a vacation rental, it's back to basics -- you have to keep your expenses down while maximizing revenue .
Is your place fully booked? If it were, at your current rents, would you be making a profit or not? This should tell you whether you need to focus on increasing your bookings or adjusting your revenue/expense picture.
To increase bookings, you have choices:
improve your marketing or compete on price, service, or on quality.
Does your ad have good pictures, and does your house look good compared to your competitors? Have you advertised on multiple websites?
Reducing your price might lead to more bookings -- will more bookings at a lower rent cover your expenses better?
If not, then could you keep the rents the same but offer some special services to attract renters -- more flexible check-in times, a "free" day, a coupon for a local restaurant or spa ?
To compete on quality, you need to look at your competitors to see if there is room at the top for another "luxury" rental. Are the best places always fully booked? Can a modest investment in your place (mostly furnishings, but other factors such as providing high quality linens also matter) upgrade it to that level?
You should definitely meet with your lenders - and don't wait, you can initiate the discussion now remotely. If there is any way to lower your mortgage, that will really help cut your expenses.
It's hard to sit down and work all this out, especially when you are facing health issues in the family. But you've taken the first step, and that is realizing that the status quo is not working. Best wishes for a good outcome!
Thanks Paul & Carol for your posts - much appreciated.
We bought the home as an 'investment' to help boost our retirement fund. We never expected to make a profit from rentals. The idea was to make enough money on increased property value to cover the costs incurred. Clearly the credit crunch wiped that idea out completely! So we never plan to live in the home in the future.
As we are not US citizens and don't have a US credit history I guess we don't need to worry about the stigma of foreclosure or strategic default. Deed in lieu of foreclosure sounds promising if our lender will agree.
In the meantime we definitely don't want to drop our rates too low. We find it attracts renters that don't care for the property & we end up having to spend more on it as a result. Now it's not just about the money though. It's the emotional roller coaster each time something goes wrong - not knowing if a guest is going to find a bedbug or not. Previously I have looked forward to our own vacations there. Now I am dreading it - not knowing what we will find. Maybe I am being over-sensitive. Hopefully if more time goes by & we remain bedbug free I will feel more positive & willing to ride out the market for a while longer.
Thanks for your support!